Focus Group: Extending credit

We asked a group of pension funds with total assets of €28.2bn about their use of credit

Some 73% of respondents to this month’s focus group say credit has become more important in their fund’s portfolio over the past five years. Over a third of these rate it as much more important.

36% of respondents argue that the trends of the past 12 months in pension fund and insurance company regulation are not helping their fund to allocate risk to a broader range of credit assets.

“It is too much like insurance company regulation with little regard for long-term investment,” says a UK fund.

Over the next two quarters, 45% intend to leave their core fixed-income portfolio unchanged, while 9% are going to shift their allocation from core sovereign bonds to corporate credit. Just over a quarter are going to move their allocation from core sovereign bonds and corporate credit holdings into other areas of credit.

A majority (82%) says most institutions can get involved in asset classes such as loans, asset-backed securities (ABS) and direct lending on some level, as opposed to their being only for the biggest European funds.

“I think sometimes [funds] do not move into ABS because they do not understand it,” says the head of pension asset management at a German fund. “People should stay away from investing in things they don’t understand.”

A UK fund adds: “Most can get involved, but the fee load is heavy and people need to understand the illiquidity issues; so it depends on the sophistication of the scheme and a clear strategy. Being small, though, doesn’t prevent one from being sophisticated or having a clear strategy.”

Over half of respondents are confident that the asset management industry can provide suitable products for funds in multi-asset fixed income or credit strategies. Over a third have confidence regarding private debt/direct lending and absolute return or long/short credit strategies.

“There is lots of product. Whether it’s suitable is a different issue. Much of this product is priced too keenly if it is liquid and managers are trying to extract too high a fee for the illiquid credit structures,” says a UK fund.

Respondents consider emerging market debt to be the most undervalued asset class, with developed market sovereign debt, inflation-linked government debt and investment-grade corporate bonds the most overvalued.

“There are a lack of instruments to invest in, or too much liquidity which is the same, and the inflated asset prices can also be seen as a reflection of the very cheap/low cash price,” says a German fund.

Over a quarter of those polled say that since the beginning of quantitative easing, it has been more difficult to trade fixed-income assets, but the impact on their performance has not been significant. However, a Swiss fund adds: “We are not a very big pension fund and we expect the situation to worsen from here.”